A Financial Adviser Has to Be More Than Knowledgeable

What are key warning signs that should make you consider switching financial advisers?

RAFAEL PARDO: When your financial adviser becomes either inattentive or nonresponsive to your requests, particularly those relating to information and explanation, an alarm bell should immediately go off in your mind. In hiring a financial adviser to guide or control your investment decisions, you presumably have done so because he or she has superior information about money management and will use that information to deal on your behalf with others who likewise have superior information. But your adviser’s acumen, without more, should be insufficient to establish the level of trust necessary for inspiring confidence that your adviser will champion your best interests in managing your money. Ideally, your adviser will cogently explain his decision-making process in recommending and taking courses of action on your behalf. Such an explanation should leave you assured that your adviser conceives of himself as your alter ego—that is, that his decisions would be no different if he were managing his own money and had similar risk preferences and financial goals as you.
Conceptualizing the adviser-client relationship in this way highlights that your adviser’s communications are a critical lens for evaluating the performance results achieved by his recommendations and actions. (After all, sometimes good decision-making can lead to poor results, and sometimes poor decision-making can lead to good results.) At the end of the day, you should want to know why it is that your adviser has suggested or adopted a particular investment strategy over others. If he fails to communicate his reasoning or if he provides an explanation that is cavalier or nontransparent, that may be a red flag indicating that it is time to find a new adviser.

Rafael Pardo (@bankruptcyprof) is the Robert T. Thompson Professor of Law at Emory University, where he specializes in bankruptcy and commercial law.